Modvat credit on duty-paid exempt input allowed; penalty reduced where relief was confined to one item.

Credit of duty actually paid on an input under the Modvat scheme could not be denied merely because the input was exempt from duty in law, where the supplier had in fact paid duty on clearance and the credit was claimed under Rule 57A. The Tribunal distinguished the Revenue's relied-upon Supreme Court ruling on its facts and upheld admissibility of credit on lime. As relief was granted only on the lime issue and no challenge was made to the findings on the other items, the penalty was reduced accordingly.

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Issues: (i) Whether Modvat credit was admissible on lime when duty had been paid on the input by its manufacturer though the input was exempt from duty under the notification; (ii) whether the penalty required reduction in the facts of the case.

Issue (i): Whether Modvat credit was admissible on lime when duty had been paid on the input by its manufacturer though the input was exempt from duty under the notification.

Analysis: The credit was claimed under Rule 57A of the Central Excise Rules, 1944 on duty actually paid at the time of clearance of lime to the appellants. The decision following the earlier Tribunal ruling on identical facts held that credit of duty paid on inputs could not be denied merely because the inputs were not liable to duty in law. The Supreme Court decision relied upon by the Revenue was distinguished because it concerned a different factual setting where the final-product manufacturer voluntarily paid duty on exempt raw material to claim exemption, whereas here duty had been paid by the supplier of the input and the appellants only sought credit of that duty.

Conclusion: Modvat credit on lime was admissible and the disallowance was unsustainable.

Issue (ii): Whether the penalty required reduction in the facts of the case.

Analysis: The penalty had been imposed with reference to three items, namely explosives, HDPE bags and lime. Since the present appeal succeeded only in relation to lime and there was no challenge to the findings regarding the other items, the penalty called for modification having regard to the limited relief granted.

Conclusion: The penalty was required to be reduced.

Final Conclusion: The assessee succeeded on the credit dispute relating to lime, and the penalty was scaled down accordingly with consequential relief.

Ratio Decidendi: Credit of duty actually paid on an input cannot be denied merely on the ground that the input was exempt from duty in law, where the duty was in fact paid by the supplier and the credit is otherwise taken under the Modvat scheme.

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